Market Overview

Markets Find Trap Door, But Are the Markets Technically Broken?



The NYSE Advance Decline line, as one of the means to measure market breadth, has been on the decline since the end of June (right black trendline). This suggests that the decliners have been outpacing advancers on the NYSE. What I want to bring your attention to on this chart are the red ovals. These areas denote where the 30 day moving average of the A/D line moved down. The S&P 500 struggles when this moving average moves lower. Since July 17th, the 30 day moving average has been moving lower. We are approaching washout levels with the Advance Decline line near -2100 today. An equity relief rally might be in the cards soon, especially with today's big down day.


A weekly look at the Nasdaq Composite with the Relative Strength comparative indicator on the bottom. As you can see, when the relative strength indicator moves lower (bottom red lines), the Nasdaq typically moves lower (red arrows on price chart). This means the S&P 500 is outperforming the Nasdaq Composite. When the relative strength line moves higher (green lines), the Nasdaq moves higher. I want to point out the blue line on the relative strength indicator, this is known as a negative divergence. Even though the Nasdaq moved higher from late December 2011 (blue arrow), the S&P 500 actually outperformed the Nasdaq. The relative strength indicator move lower while the Nasdaq move higher. This created the bearish negative divergence. This negative divergence ultimately signaled a bigger drop for the equity markets what was later blamed on Europe (black arrow). The main theme to take away from this chart is when the Nasdaq's relative strength line rolls over and moves lower, the markets become a more challenging environment to make money in. That is because investors are seeking bigger, larger cap names and shunning the riskier, higher beta plays in the Nasdaq. Better said, when the relative strength line is moving lower (red lines) the markets are in risk off mode. When the relative strength line is moving higher (green lines) the market is in risk on mode. Currently the indicator is moving lower signaling a risk off trading environment. Friday and today confirm this indicator.


Another reason I have been neutral to bearish on the equity markets. TLT is powering higher once again today and breaking a resistance trendline to the upside set back on June 1st. When bonds rise, the equity markets tend to struggle. Today is no different. In order to produce a more meaningful stock market rally, bonds need to break down and stop continuing to make new highs.


Another indicator I use to measure market strength/weakness is the number of new 52 week highs and the number of new 52 week lows. The green numbers are the number of new highs on that particular day. As you can see the # of new highs continued to build and move higher as the S&P 500 moved higher since May 20th. However, what is important here is the S&P peak on June 2nd when the # of new highs recorded was 296. Thursday of last week, the S&P 500 revisited the same price level but with only 190 new highs. This is a sign of waning strength for the S&P 500. To add fuel to the fire, more new lows are being made today than when the S&P declined for 6 straight days. This suggests to me that there are investors beginning to lock in gains or beginning to sell into strength here.


An updated look at Spanish 10 year bond yields. They are making new annual highs as investors fear the bailout will have to be bigger than initially thought. If these yields continue to move higher, US equity markets will have difficulty breaking out higher from its current trading range. I will be watching for higher yields that offer a signal that Spain could be the next Greece, as Greek yields, some time ago, continued to build to crisis levels until it became an epidemic that destroyed a lot of US investment values.


From my July 6th research, here is an updated look at the U.S. Dollar. The green X in the upper right hand corner is where the Dollar currently trades at $83.70. This would put the Dollar above its 2010 highs once again and a greater probability of a break to the upside soon. As I mentioned in my research piece July 6th, if the Buck breaks above $83.83 and remains above that level for a few confirmation days, my $90 price target will be well within reach. I also mentioned that a higher dollar will eat into multi national, big exporter company profits. You have seen a taste of this in the 2nd quarter earnings as many companies have beat in earnings per share, but have missed their revenue numbers. 3rd quarter earnings could have even more earnings erosion if a break above $83.83 occurs in the dollar.


An updated look at Brazil as it dangerously approaches the dreaded neckline once again of a Head and Shoulders topping pattern. A break below $49.50 would be a major breakdown for this BRIC nation.


China flirting with a new annual low. $31.85 needs to hold for FXI to eliminate a bigger potential breakdown soon. Pair this up with an EWZ breakdown and this event could lead to lower US prices. Watch your support levels here.


Here is an updated look at the declining issues of the NYSE. I notified you on July 13th to watch for a break above +2000 decliners. Friday of last week, we broke the downward sloping trendline to the upside making any equity rally challenging. However, declining issues are approaching oversold levels near 2600. A brief rally may ensue.

Final Thoughts: Last week I interpreted the writing on the wall for a potential equity pullback. The recent Dow Diamond pattern, the Dow Theory non confirmation, the major resistance zone of May 2011 (1372) of the S&P 500, and the White Elephant in the room in bond yields that continue to move lower as equity prices increased. Friday started the swift descent down and today is a good follow through down day, however the equity indexes have bounced off their lows set early on in the trading session.

Volumes on Friday and today have been low to the downside which tells me the selling may not be done yet. The general consensus of my trading professionals I speak with weekly state traders are waiting on the big Fed meeting July 31st and August 1st. There is to many opposing views on do we get QE3 or not, hence the reason why we are bumbling around between 1340 and 1372 in the S&P. Time cures not all things, but most things including the stock market. Most of my important technical indicators are sour or negative currently. With time, I believe my indicators and the bond vigilantes win out and equity prices move lower toward 1335 or even lower before Ben Bernanke speaks next Wednesday.

However, I am not ruling out a bounce soon either. From my many years of experience with what I call pivot points in the market, equity markets are nearing important “Judgment Day” pivot levels that either will produce a bounce to higher prices or a pause with a more significant move to the downside coming in the next few weeks. The week with the most number of earnings reports is upon us. MCD missed this morning on both fronts, EPS and revenue. Titans like Apple, UPS, AT&T, Caterpillar, Pepsi, Amazon, Starbucks and several more all report his week. I will be watching to see if revenue is an issue with these companies as well. Remember, typically revenue leads and earnings lag. We could be in for a challenging 3rd quarter earnings season if current revenue numbers are the tell here.

Mike Dalman, CMT

Mike Dalman Investment Research

Chief Technical Analyst

Posted-In: Technicals Hot Intraday Update Trading Ideas ETFs General


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